For business owners in the freight industry, collections take time, manpower, and expertise. And even with all the right tools in place, payments to carriers are rarely made immediately. The industry-standard collection period is 40 days, but some run to 60, or even 90 days.
When you have fuel to purchase, drivers to pay, and trucks to maintain and insure, waiting weeks for accounts receivables can jeopardize your short-term ability to fund operations.
To bridge gaps in working capital, carriers may rely on credit cards or bank loans. But applying for a bank loan can be an arduous, drawn-out process. And both of these options can result in thousands of dollars in interest payments.
To access capital without taking on debt, carriers, trucking companies, and owner-operators often turn to freight factoring.
What is Freight Factoring?
Freight factoring is when a trucking company sells its invoices to a third-party financing company. You may hear freight factoring referred to as load factoring, transportation factoring, or freight bill factoring. Instead of waiting weeks or months for the customer to remit the owed amount, the financing company makes a payout within 24-48 hours and takes responsibility for collection.
When the carrier sells its invoices to a factoring company, it receives a percentage of the outstanding amount. Factoring companies typically offer to front 80% to 95% of the outstanding bill and remit the remaining amount, minus their own fee, upon collection.
In contrast to a traditional bank loan, freight factoring allows carriers to borrow against receivables, rather than money they hope to make in the future. Freight factoring is also attractive because there is no need to put business assets on the line. Outstanding invoices are the only collateral required.
Why use Freight Factoring?
Carriers use freight factoring to better manage cash flow.
Offering net terms to shippers is common in the freight business. But transportation companies that are waiting for cash that is tied up in outstanding receivables miss out on opportunities to grow and can struggle to meet day-to-day expenses.
By getting paid when your business completes deliveries, you will have more resources to pick up new loads, take on new clients, and expand routes—without going into debt.
Another benefit is that you can transfer the burden of collections to the factoring company. Analyzing the risk of non-payment, sending reminders, and collecting receivables can be a huge drain on resources—especially for small trucking companies that don’t have a dedicated finance department.
A better way to finance carrier operations
Compared to traditional lending, freight factoring provides faster access to capital at competitive rates. Trucking companies that are sick of waiting for accounts receivable to catch up with cash needs can take advantage of factoring to maintain a healthier cash flow and grow their business.
In the next Money Power column, I’ll discuss factoring more in-depth and preview Inxeption Capital services to come.